Fixed deposits remain India's favourite safe investment – but few depositors know exactly how FD interest is calculated, why the maturity amount is higher than simple interest suggests, or how much tax they will pay. This guide explains the FD interest calculation formula with worked examples, compares cumulative and payout FDs, and covers TDS on FD interest, premature withdrawal penalties and smart ways to earn more.
How Is FD Interest Calculated?
Banks offer two main kinds of fixed deposit:
- Cumulative FD – interest is added to your deposit every quarter and paid with the principal at maturity. This uses compound interest.
- Non-cumulative FD – interest is paid out monthly, quarterly, half-yearly or yearly, and the principal is returned at maturity.
Most Indian banks use quarterly compounding for cumulative FDs. For deposits of less than six months, interest is usually simple interest paid at maturity.
FD Interest Calculation Formula
A = P × (1 + r ÷ 4)4 × t
- A = maturity amount
- P = deposit amount
- r = annual interest rate as a decimal
- t = tenure in years
FD interest = A − P
Worked Example: ₹1 Lakh FD at 6.5%
Deposit ₹1,00,000 for 1 year at 6.5%, compounded quarterly:
- Quarterly rate = 6.5% ÷ 4 = 1.625% = 0.01625
- Number of quarters = 4
- A = 1,00,000 × (1.01625)4 = ₹1,06,660
- Interest = ₹6,660
That is more than ₹6,500 of simple interest because interest earned in the first three quarters also earns interest. The effective annual yield is therefore about 6.66%, not 6.5%.
FD Maturity Table at 6.5%
| ₹1 lakh for | Maturity amount | Interest earned |
|---|---|---|
| 1 year | ₹1,06,660 | ₹6,660 |
| 2 years | ₹1,13,764 | ₹13,764 |
| 3 years | ₹1,21,341 | ₹21,341 |
| 5 years | ₹1,38,042 | ₹38,042 |
A senior citizen earning 7.05% on a 5-year FD would get about ₹1,41,826 on the same ₹1 lakh.
FD Interest Rates in 2026
After the RBI cut the repo rate during 2025, FD interest rates have eased. In September 2026, large banks such as SBI, HDFC Bank, ICICI Bank and Axis Bank offer up to about 6.45%–6.50% for regular depositors on their best tenures, and senior citizen FD rates of about 7.05%–7.10% – usually 0.25 to 0.75 percentage points more than the regular rate. Small finance banks may offer 7.5% or more, with higher risk. Rates change often, so check the bank's website before you invest.
Monthly Interest FD: How Payouts Are Calculated
If you choose a monthly interest FD, banks pay a slightly lower amount than the simple one-twelfth of the annual interest, because they discount the quarterly-compounded rate to a monthly equivalent. For ₹5 lakh at 6.5%:
- Simple one-twelfth: 5,00,000 × 6.5% ÷ 12 = ₹2,708
- Typical bank monthly payout: about ₹2,694
Quarterly payout FDs pay the simple quarterly interest (₹8,125 on ₹5 lakh at 6.5%). Payout FDs suit retirees who need regular income; cumulative FDs grow faster if you do not need the cash.
TDS on FD Interest
FD interest is fully taxable at your income tax slab rate, whether you receive it or it is reinvested. Banks deduct TDS on FD interest at 10% (20% if your PAN is not linked) when the interest from that bank in a financial year exceeds:
- ₹50,000 for regular depositors
- ₹1,00,000 for senior citizens
TDS is not the final tax. If you are in the 20% or 30% slab, you must pay the balance when you file your return. If your total income is below the taxable limit, submit Form 15G (below 60) or Form 15H (60 and above) at the start of the year to avoid TDS. Check your overall tax with the income tax calculator.
Premature Withdrawal Penalty
Breaking an FD early usually costs a penalty of 0.5%–1%, applied to the rate for the period the money actually stayed with the bank. Example: you open a 3-year FD at 6.5% and break it after 1 year. If the bank's 1-year rate was 6.25% and the penalty is 1%, you get 5.25% for that year – about ₹1,05,354 on ₹1 lakh instead of ₹1,06,660. Some banks waive the penalty for senior citizens or for deposits reinvested with the same bank.
Tax-Saving FD
A tax-saving FD has a 5-year lock-in and qualifies for the ₹1.5 lakh deduction popularly known as Section 80C – but only under the old tax regime. Interest is still taxable, and you cannot withdraw early or take a loan against it. If you use the new regime, a regular FD gives more flexibility.
Is Your FD Safe? DICGC Insurance
Bank deposits are insured by the DICGC (a subsidiary of the RBI) up to ₹5 lakh per depositor per bank, covering principal and interest together. Deposits in different banks are insured separately. If you have more than ₹5 lakh, consider spreading it across banks.
FD vs Other Safe Investment Options
| Option | Returns | Lock-in / liquidity | Tax on returns |
|---|---|---|---|
| Bank fixed deposit | Fixed for the term | 7 days to 10 years; early exit with penalty | Taxable at slab rate |
| Recurring deposit | Same as FD for similar tenure | Monthly deposits; early exit with penalty | Taxable at slab rate |
| Post Office Time Deposit | Government-set, reviewed quarterly | 1, 2, 3 or 5 years | Taxable at slab rate |
| Senior Citizens' Savings Scheme | Government-set, fixed at opening | 5 years; for 60+ | Taxable at slab rate |
| PPF | Government-set, reviewed quarterly | 15 years, partial withdrawals allowed | Tax-free (EEE) |
| Liquid / debt mutual funds | Market-linked, not guaranteed | Withdraw any day | Taxable at slab rate |
FDs win on simplicity and flexibility of tenure. PPF wins on tax for long-term savers, and liquid funds are handy for an emergency fund you might need at short notice. Check the latest small savings rates on the India Post website – the government reviews them every quarter.
How to Open an FD Online
- Log in to your bank's net banking or mobile app and choose Fixed Deposit or Open Deposit.
- Enter the amount and tenure, and choose cumulative or interest payout.
- Add a nominee – this makes it much easier for your family to claim the money if something happens to you.
- Choose what happens at maturity: auto-renew the principal, auto-renew principal and interest, or credit to your account.
- Confirm and download the FD advice for your records.
Tips to Earn More From FDs
- Ladder your deposits – split ₹3 lakh into 1-, 2- and 3-year FDs so some money matures every year and you can reinvest at the prevailing rate.
- Pick the bank's "special" tenure – banks often pay their highest rate on odd tenures such as 444 days or 3 years 1 day.
- Book in a senior citizen's name within the family where appropriate, to get the higher rate and TDS limit (the interest is taxed in their hands).
- Choose cumulative over payout if you do not need regular income.
- Compare with alternatives – for goals more than 7 years away, read our SIP vs FD comparison.
Joint FDs and Nominees
You can open an FD jointly with a family member in modes such as "either or survivor", which lets either holder withdraw the money and makes the transfer smooth if one holder dies. TDS and income tax apply to the first-named holder, so choose the order carefully. Always add a nominee – it avoids long paperwork for your family later.
Frequently Asked Questions
How is FD interest calculated?
For cumulative FDs, most banks use quarterly compounding: A = P × (1 + r/4)^(4t). Interest is the maturity amount minus the deposit.
How much interest will I get on ₹1 lakh FD for 1 year?
At 6.5% with quarterly compounding, about ₹6,660, giving a maturity amount of ₹1,06,660.
When is TDS deducted on FD interest?
When interest from one bank exceeds ₹50,000 in a financial year, or ₹1 lakh for senior citizens. TDS is 10% with PAN, 20% without.
Is FD interest taxable?
Yes. FD interest is added to your income and taxed at your slab rate every year, even for cumulative FDs where you receive the interest only at maturity.
What is the penalty for breaking an FD early?
Usually 0.5% to 1% lower than the rate applicable for the period the deposit was actually held. Terms vary by bank.
Are FDs safe?
FDs in scheduled banks are very safe, and DICGC insures up to ₹5 lakh per depositor per bank including interest.
What is the difference between cumulative and non-cumulative FD?
A cumulative FD adds interest to the deposit every quarter and pays everything at maturity, so it earns more. A non-cumulative FD pays interest monthly, quarterly or yearly, which suits people who need regular income.
Can I take a loan against my FD?
Yes. Most banks lend up to 85% to 90% of the FD value at about 1% to 2% above the FD rate, which is usually cheaper than breaking the FD or taking a personal loan.
Is FD interest calculated on 365 days?
Banks calculate interest for the exact number of days the money is deposited, usually on a 365-day year. For deposits shorter than six months, interest is generally simple interest paid at maturity.
Disclaimer: Rates were checked in September 2026 and change often. Payout and penalty rules differ between banks. This article is general information, not investment or tax advice.